UPM Annual Report 2021

BUSINESSES

UPM

BEYOND FOSSILS

STRATEGY

RESPONSIBILITY

GOVERNANCE

ACCOUNTS FOR 2021

PIONEER IN ENERGY UPM ENERGY The availability of carbon-free electricity is central in mitigating climate change.

OUR DIRECTION • Profitable growth in zero-carbon electricity generation

KEY FIGURES

2021 2020

Sales, EURm

526 270

379 171

• Embracing the decarbonisation of society • Solutions for industrial energy excellence

Comparable EBIT, EURm

Capital employed (average), EURm

2,375

2,313

Comparable ROCE, % Personnel on 31 Dec.

11.4

7.4 70

OUR STRENGTHS • Competitive, zero-carbon electricity generation asset portfolio • Strong track record in physical and financial electricity markets • World-class expertise in the optimisation of industrial energy

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Comparable EBIT increased due to higher electricity sales prices. The Nordic hydrological balance was below normal at the end of December. In Finland, the hydrological situation was close to normal.

CASE

In August, we announced an investment in an ultracapacitor for hydropower plants in Kuhmo's Ontojoki River. This investment will increase our ability to producemore and faster reserve power fromhydropower plants. The industrial-scale project will pilot innovative technology tomeet the changing needs of the electricitymarket and enable more renewable energy in the grid. (right) We continued the extensive renovation and modernisation of the Kuusankoski hydropower plant. The phased project will be fully completed during the first quarter of 2023. The plant's average annual energy production is expected to increase from the current 180 GWh to 195 GWh. Modern hydropower technologies are not only more efficient but also better for the environment. Market-oriented solutions are contrib uting to the transformation of the energy market, and new transmission connections will increasingly link the Nordic electricity market to the continental European market. Electrification will play an important role in moving society away from fossil-based en ergy sources. UPMEnergy is in an excellent position in a changing energy market with its CO 2 -free electricity production.

97% of our electricity generation is from CO 2 -free hydro and nuclear power. The CO 2 -free electricity we produce contributes to achieving the 1.5º C climate commitment signed by UPM. UPMEnergy's hydropower plants meet the growing demand for renewable energy. Hydropower offers rapid adjustment to an electricity system in which weather depen dent solar and wind power are becoming increasingly important. Flexible hydropow er balances the system in an increasingly volatilemarket, while nuclear power ensures reliable baseload capacity for the system. The electricity generated is sold to the Nordic Nord Pool power exchange. We trade directly in physical electricity and electricity derivatives. We also provide optimisation and consumption flexibility services to industrial electricity users and other energy companies. Creating value in a volatile market The price of electricity rose to a record level in Finland and in Europe in 2021. Prices of natural gas and emission allowances and the droughts in Sweden and Norway pushed up electricity prices in the Nordic countries. UPMEnergy benefitted significantly from

higher electricity sales prices and succeed ed in optimising production and creating value in a volatile market. Hydropower production volumes reached a good level. Annual nuclear productionwas slightly lower than in the previous year due to longer maintenance outages at nuclear power plants. We continued to take COVID-19-related preventivemeasures to ensure business continuity, especially in 24-hour monitoring and control of hydropower plants. We are responding to the growing need for carbon-dioxide free electricity as society electrifies and moves away from fossil fuels. The largest ongoing investment project is the construction of the Olkiluoto nuclear power plant unit 3 by Teollisuuden Voima (TVO). The Olkiluoto 3 project is in the final stretch and is scheduled to start regular electricity production in July 2022. UPM's share of the new unit's production will be approximately 500 MW generated through Pohjolan Voima's ownership. The Olkiluoto 3 will significantly increase the supply of CO 2 -free electricity in Finland. Fossil-free electricity plays a key role in the electrification of society

Measures for the recovery of migratory fish stocks While hydropower is a cost-effective, renewable and emission-free way to generate electricity, it can also have adverse impacts on water bodies and their ecosystems. We are working closely with authorities and other stakeholders to minimise these impacts. In addition to the regulatory fishery fees required by the permit conditions, we protect and restore migratory fish stocks through our own migratory fish programme. The pro gramme involves dismantling migratory barriers and testing new ways to rebuild fish stocks in different parts of Finland. The migratory fish programme was also promoted in 2021. UPM submitted an application for a permit to dismantle the dam structures of a disused water intake in Arvajankoski, Jämsä, and to carry out a fish eries rehabilitation in Arvajankoski. We are actively looking for new potential sites for the removal of migration barriers and new innovative ways to promote fish migration in co-operation with stakeholders.

MORE BALANCING POWER FROM AN ULTRACAPACITOR UPM is now the first energy company to pilot energy storage with an ultracapacitor in a system comprising two hydropower plants. The power plants are Katerma in Kuhmo and Kallioinen in Sotkamo, both located along the Ontojoki River in Finland. Ultracapacitors are electrostatic devices that can quickly discharge or charge large amounts of electrical power. Combined with a hydropower plant, an ultracapacitor can react in milliseconds to meet the rapid demand for power. It acts as the fast-responding part of the system, responding to the power demand first minutes, after which hydropower takes the lead and continues to balance the electricity system. As the amount of renewable energy is pre dicted to grow in the future, more balancing power capability will be needed to quickly rebalance the grid when needed. Innovations like this are a prerequisite for adding renew able energy to the system. We are using it as a system to bring new reserves to the market and to enable more renewable energy in the grid. The addition of an ultracapacitor to a

hydropower plant will reduce the need for rapid response control of the plant and allows smooth power generation control. It will have no impact on dam safety, water use or the aquatic environment. Construction started in autumn 2021, and the ultracapacitor is expected to be connected to the power plants in the second quarter of 2022.

www.upmenergy.com

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UPM ANNUAL REPORT 2021

UPM ANNUAL REPORT 2021